#19 The most important technical innovation of the year, Bitcoin narratives and politics
The Ethereum roadmap holds a transformative power to the whole industry (the whole world?). We also speak about the politics of crypto, explain hashrate and, as always, there's a little room for NFTs.
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ETH2 & the application-infrastructure cycle
There’s this TV series called Snowpiercer, based on a movie with the same name, which is itself based on a French comic book from the 80s: one of those post-apocalyptic stories where the Earth is engulfed in a neverending winter. The only survivors are those on board the Snowpiercer, a 1,001 cars long train that circles the planet constantly, waiting for better weather. The train serves as a metaphor for humanity: the humans that inhabit it are divided into first, second, and third class, their values, beliefs, and struggles, portraying a miniature version of a world divided into castes. The drama unfolds in a straight line.
In the series, the people who govern the train are the engineers: they are the ones who can operate the locomotive, they fix what’s wrong, and they’re the ones the passengers look to when there’s trouble. I don’t know about the novel or the movie: the series was a simple, crude metaphor, but the engineer thing stuck. Because for the last 30 years, engineers are indeed in control.
FAANG -the acronym that represents Facebook, Amazon, Apple, Netflix, and Google- and whatever the equivalent Asian acronym is, has done more to shape the world how we see it today than most governments. These corporations have designed the way we work, socialize, or inform ourselves, and their most important resource is engineers.
If anything, crypto is even more like this than its Web 1 and 2 predecessors. That is why one of the most important developments of 2022 looks like this.
This is the Ethereum roadmap. A chronological (left to right) representation of the technical progress in store. Ethereum is the second most important project of the cryptographic ecosystem, after Bitcoin. But as this roadmap unfolds, it will become more and more apparent that we are talking about two very different technologies.
Bitcoin excels as a store of value. Ethereum strives to become a global, decentralized computing system. The infrastructure layer for the development of decentralized applications. This is easier to understand when you portray its opposite. When you shop online with PayPal, you are using a centralized application (PayPal) running on a centralized infrastructure (Google Cloud). When you get a loan from Uniswap, you are using a decentralized app built on a decentralized network.
Decentralization matters.
Decentralization avoids single points of failure. This avoids technical trouble (no center, no downtime) and manipulation (remember PayPal cutting off Wikileaks for political pressure).
Centralized organizations tend to be extractive, while decentralized organizations, by design, distribute benefits. Like when Facebook, now Meta, built an empire with the collaboration of thousands of developers creating an ecosystem or interconnections and millions of users providing the actual content and interactions without having any say in anything whatsoever.
So far, the main applications built over Ethereum have been financial. It’s in crypto’s DNA. But 2021 was the year of NFTs. And other less financial use cases, like DAOs, are starting to poke their heads out. And the success of these applications has come at a price: transaction fees skyrocketed. With such transaction costs, Ethereum`’s dream of being the base layer for a future financial ecosystem seems unattainable.
We seem to be in the middle of the apps-infrastructure cycle—the tennis match between innovative use cases and the conditions that allow them to happen.
Planes (the app) were invented before there were airports (the infrastructure). You don’t need airports to have planes. But to have the broad consumer adoption of planes, you do need airports, so the breakout app that is an airplane came first in 1903, and inspired a phase where people built airlines in 1919, airports in 1928 and air traffic control in 1930 only after there were planes. The Myth of The Infrastructure Phase
Applications have clogged Ethereum. And this is how Ethereum plans to unclog itself.
The Merge changes the consensus mechanism from Proof of Work to Proof of Stake, reducing energy consumption.
The Surge adds scalability through rollup sharding. As a result, transactions get cheaper, but they inherit the L1’s security.
The Verge. It simplifies validation and facilitates becoming a node, which helps security improve as scalability does.
The Purge. Eliminates blockchain deadweight.
The Splurge. It is a scrap bucket of innovations, but they needed a miscellaneous chapter that rhymed with the rest.
This year we will be witnessing a new step in the infrastructure stairway -an event that is likely to kick off an avalanche of innovation. We know some of it already: DeFi, NFTs, DAOs, etc. Only bigger and faster. Other applications are yet to be imagined. Crypto works. It’s now time to make it work for everybody.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we'd be writing for ages.
1. Politics | Which side does crypto lean towards?
Here’s another 2022 best wish to hold dear: that crypto remains separated from politics as much as possible. For most of its life, the ecosystem has been either too small or too confusing for a single political ideology to get a hold of it. There are some libertarian and anarchist traces in its past. But in the current times, the estimated 300 million people holding crypto worldwide only have that in common: they hold crypto.
Things might change, though. The political weaponization of crypto is a likely side effect of regulation. Once politicians of one side start holding a strong opinion about the industry, the opposing party will take the opposite stance.
Crypto does not fit well in any box, and that’s probably our best vaccine. It’s just too complex for the accustomed shallow, binary political speech. Here’s a list of the main issues that could make it to the political debate. There’s ammo for both sides and in a very confusing mixture.
The debate between investor protection VS freedom and individual responsibility.
The challenge crypto poses to big corporations, like big tech and big banks.
Environmental protection through the energy consumption concerns.
Taxation and general government intervention.
Nationalism: is our country going to lead or lag? Or worse: will the bad guys beat us?
Business and entrepreneurship promotion, high-quality job creation.
Fairer economies and generalized access to financial services.
2. Institutional investment | Aave Arc
DeFi’s 2021 was not as good as the previous year. In a market notorious for its short attention span, the sparkling new industry of NFTs and the race towards scalability have cast a shadow on decentralized finance. One of the reasons to believe in a consolidation of the sector is institutional investment. DeFi has belonged to insiders and adventurers, but this is going to change.
The Aave team notes recent research from Blockdata estimating that if 1% of the assets managed by the world’s largest banks were invested into DeFi, almost $1T would be deployed. Aave’s New Platform Attracts 30 Institutional Players in Big Push for Growth
Aave Arc is a step forward in this path. Aave is currently the fourth largest DeFi protocol by cross-chain total value locked; Aave Arc is its product for institutions. So far, it is a solo effort, but it is headed to become a precedent for other DeFi platforms.
Aave Arc tries to tackle the regulatory concerns of traditional financial institutions by creating the figure of whitelisted intermediaries: companies that apply to the protocol and subject themselves to a decentralized governance vote to become the guardians of AML and KYC in the name of third parties.
So far, only Fireblocks had been approved by the community as a whitelisted Aaver Arc operator. Still, recently, 30 other institutions joined the list in what constitutes a great leap forward in DeFi onboarding.
3. NFT marketplaces | OpenSea to the moon
t looks like January 2022 could end up being the best month in NFT volume and number of unique trades. If you needed more signals of the general buoyancy of the industry, this week, we’ve had a few more. Besides the celebrity purchases and the big brand adoption, we saw some news coming from the marketplace side of things last week.
OpenSea, the largest NFT marketplace, closed a $300M round with a $13.3B valuation, turning it into one of the biggest unicorns in the space. Remember that the exchange FTX was last valued at $25B. What explains this valuation?
There are other ways to get our hands on the company’s scale. Data from Dune Analytics collected by @rchen8 has more granular historical data to parse. Per Dune, OpenSea saw trading volume of $3.25 billion in December, $2.37 billion in November and $2.64 billion in October. Combined, those figures work out to $8.26 billion in volume, a 2.5% cut of which would be worth $206.5 million. Techcrunch.
It seems like OpenSea’s leadership is hard to contest, but there might be a new cool kid in town. LooksRare launched recently, and did it with a token airdrop. Maybe LooksRare is a better platform than OpenSea, maybe it isn’t; but the fact that they launched a token means they are thinking of distributing the revenue with the community. A very powerful statement and marketing tool. For those who are still wondering about how Web3 (the redistributive web) operates, this is a good example for you: between two very similar platforms, which one would you choose? The one that rewards you for your participation or the one that doesn't?
4. Talent | how many developers work in crypto?
Developer count is a very relevant metric when evaluating the health of the crypto ecosystem. While the general discourse will revolve around pricing, especially Bitcoin’s, there are many indicators of the temperature of the cryptographic industry, and the pace at which it attracts top-notch talent is one of them.
Crypto research firm Electric Capital recently published a report that extrapolates headcount and activity based on the analysis of open-source code commits.
Some top conclusions were:
18,000+ monthly active developers commit code in open source crypto and Web3 projects
34,000+ new developers committed code in 2021 — the highest in history
4,000+ monthly active open-source developers work on Ethereum, 680+ open-source developers work on Bitcoin
20%+ of new Web3 developers join the Ethereum ecosystem
65% of active developers in Web3 joined in 2021; 45% of full-time developers in Web3 joined in 2021
5. Bitcoin | Rio de Janeiro to add BTC to its treasury and as payment method
Narratives are one of the most abstract, yet relevant, components of the behavior of markets. In the case of Bitcoin, several narratives coexist. Sometimes one is more prevalent, sometimes another.
Two of the most widespread ones are the store of value and medium of exchange narratives. The Bitcoin as “digital gold” definition has grown deep roots, as it becomes an asset in an increasing number of treasuries and portfolios. One good example is Tesla’s incorporation of $1.5B in Bitcoin in their treasuries in the first half of 2021. In the “medium of exchange” narrative, El Salvador probably is one of the biggest examples in place, since it approved Bitcoin as legal tender.
Well, Rio de Janeiro recently embraced both. The city’s mayor announced that this major Brazilian city will invest 1% of its treasury in cryptocurrency, and also that its over 6M inhabitants will be able to pay property taxes in bitcoin.
6. Mining | What is hashrate?
Proof of Work is the mechanism by which miners compete to validate the next block on a blockchain. Miners get their computers to solve complex mathematical puzzles, and the winner takes the price. The computational power used to mine in a Proof of Work consensus mechanism is called the hashrate. And global hashrate metrics are used as a proxy to understand the effort put into securing the network.
Global hashrate recently took a big blow, leading to a temporary drop in Bitcoin price, after civil unrest broke in Kazakhstan.
Ever since the great Chinese migration, Kazakhstan had become the number two country in Bitcoin mining, after the US. In the early days of the year, citizen protests broke out following a rise in liquefied gas prices. Protesters met with deadly military force, and drastic measures were taken by the Russified government, including a complete shutdown of the internet in the country. The shutdown left Kazakh miners outside of the game.
Nevertheless, the drop was minimal compared to what the network witnessed in the first weeks of the Chinese ban.
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